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The 2% rule is a powerful
tool in Forex trading. By adopting this rule you're using a strategy
that decreases the size of your losses during losing streaks, an
important consideration. There is, however one small caveat that you
need to be aware of when using the 2% rule to calculate how many Forex
shares you are going to buy. As you know, the number of shares you can
purchase is determined by your maximum loss and the size of your stop.
This means that by increasing your risk, you can also increase the
dollar value of the position you open. By simply shrinking your stop
size, that is by setting a tighter stop loss, you can increase the
dollar value of the position you open.
To avoid a situation where you could end up with excessively large
positions that may put your Forex trading float at risk, you can choose
to introduce an extra rule. This rule would limit the dollar value of a
position to be no more than a set percentage of your entire Forex
trading float.
For example, you might decide that you'll never open a position that has
a dollar value of more than 25% of your entire Forex trading float. This
rule would only be executed if, after calculating the formula that
determines how many shares you buy, you find the dollar value of that
position would greater than 25% of your float. If this happened, you
would scale down the position to make sure it did not exceed that 25%.
The percentage that you decide upon will depend on the type of system
you're trading, the size of your float, and your personal tolerance for
risk. Generally, smaller Forex trading floats might use 25%, and larger
Forex trading floats might use as little as 10% or even 5%. There are no
definitive numbers, and the percentage that you choose will depend on
your personal circumstances.
Once this tendency is corrected for you will have all your money
management rules in place, ready to control your risk in the Forex
market. Now you need to take the next step. Test your system to find out
which of the variables best suit you, remembering always that position
sizing is the most significant part of any system design. It is the
lynchpin of money management. Once you've tested your system, and
fine-tuned your rules, you will be well on your way to becoming a
successful Forex trader.
About the Author: Discover BIG profits from the market by downloading
your FREE copy of David's new Ultimate Stock Trading Systems course.
http://www.ultimate-trading-systems.com/forex.htm
Source: www.isnare.com
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